Tipping Point

When the seeds of the Arab Spring were sown in 2010 in a market in Tunisia, few would have foreseen the chain of events that followed. The resulting wave of civil protest and unrest that rippled across north Africa led to the collapse of regimes and leaders that had been in place for many decades, most notably Muammar Gaddafi. Roll forward nearly a decade and 9,123 kilometres and another otherwise unremarkable marketplace finds itself at ground zero for the current bout of volatility in markets. In reality there is little to link these events, but the pattern of snowballing and onward contagion is perhaps not so different as camels’ backs get broken.

On Friday when meeting clients I was reminded how quickly a chart becomes out of date. Looking at our screens this morning that could not be more clear with asset prices reacting sharply to the largest percentage fall in oil prices since the first gulf war. As I write equity markets are down significantly and haven assets such as quality sovereign bonds, the Japanese Yen and gold are higher; the latter to levels not seen since the height of the aforementioned Arab Spring. Treasury yields have plummeted as investors have fully priced a three-quarter point cut at the Fed’s next meeting – that coming on top of the emergency 50bps cut effective March 3rd. These are extraordinary times.

I’d argue today’s moves are not due to the Coronavirus itself, but to the second and third order reactions to it; OPEC wanting to cut production and the Russian decision not to play ball. The Saudis quickly countered with the decision to increase production, potentially flooding the market with oil and driving down prices in a move reminiscent of 2014 when the same protagonists tried to drive US shale producers out of business. That episode resulted in more efficient US shale extraction and saw the US leapfrog Saudi Arabia as the world’s largest producer of crude oil. In the years that followed we have witnessed a shift not only in where power is concentrated within the kingdom, but on their economic focus and intent to become less reliant on oil revenues going forward.

What we are seeing several months on from the virus’s first appearance is akin to a metaphorical mutation as the global economy becomes infected, crossing supply chains and sectors as well as geographies. In the same way that street vendor Mohamed Bouazizi was ‘Patient Zero’ for what became the Arab Spring, COVID-19 is likely to be identified as the root cause of what is fast becoming a much broader issue beyond the scientific sphere. As nations strive to both contain the virus and protect their economic interests, we should expect frictions to surface. How this plays out remains to be seen but there are likely to be further second order effects that would not otherwise occur.

Price moves have been extreme, not dissimilar to those seen during the depths of the financial crisis, albeit cumulative equity drawdown is some way off that. Our role as fiduciaries is to navigate safe passage for our clients through waters that will inevitably at times be challenging as they are today. Our seasoned investment process and experienced team allows us to carry out this role effectively, ensuring the overall portfolio construct remain robust, while staying focused on our clients’ longer-term outcomes. We remain mindful that risk also presents opportunity and are continually reappraising our portfolio positioning as the situation evolves.